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Low Interest Rates: The New Normal? (Hint: No)

We’ve been thinking a lot lately what direction mortgage interest rates may be headed and also what if anything would represent a “normal” mortgage rate if there ever was such a thing.

In December, real estate brokerage Redfin posted data showing a combined 83% of survey respondents considered a “normal” rate for a 30-year fixed rate mortgage to fall under 5% (seen in the screenshot below). As mortgage professionals, we believe these low rates to be “once in a lifetime” rather than normal.

As the survey authors evidence, not until March 2009 had mortgage rates ever been below 5%. Since 1990, interest rates have averaged 6.7%.

Here at the office, this research served to freshen our somewhat fading memories – one of our officers brought up the fact that in the 1980s, interest rates were in the high teens – yes, 16, 17 and 18 percent!

This got us to wondering what things looked like going back even further. We found that Freddie Mac has been tracking mortgage rates since 1972; you can see their data in the graph below.

Doing some simple number crunching, we learned that the average rate from 1972 to 2013 is 8.8%. Not bad – but hardly “low” compared to today’s rates.

Even more interesting, however, is that during this 41 year period, we had 13 consecutive years where the rate was 10% and above (1978 – 1990). That’s a third of the entire period!

Why we have low rates today

One of the many reasons mortgage rates go up and down is due to actions by the Federal Reserve. In 1990, for example, Federal Reserve Chairman Alan Greenspan lowered interest rates in an attempt to keep the country from slipping into a recession.

When Greenspan lowered interest rates in 1990, this action reduced the return on savings. To offset income losses, people began investing in the stock market.

This increased stock market activity, when coupled with the dotcom boom, created a bubble. Suddenly, internet companies with little to no actual revenues had market valuations in the billions of dollars. Many of these companies went belly up and the stock market bubble burst in 2000. Subsequent events, including the September 11, 2001 terrorist attacks, plunged the country into recession.

In order to offset these events and prevent a recession, the Fed began incrementally lowering a key interest rate used between banks, from January 2001 to June 2003. During this period, the housing market began picking up quite a bit of steam.

With rates so low, investment banks looking for profits turned to certain securities tied to real estate prices. Unfortunately, the housing bubble did what bubbles do and burst – leading to the Global Financial Crisis of 2007 – 2008.

In response to the financial crisis, the Fed introduced additional policies engineered to keep rates artificially low in an effort to ease credit and further stimulate the economy.

Financial experts believe the Fed is expected to wean the country off these artificially low rates through 2014 using a policy called Quantitative Easing.

Are today’s low rates “normal”?

Based on the data and history itself, 4 – 5% mortgage rates are anything but normal. What is normal? It’s hard to say.

The high rates of the 1980s can’t be considered normal and the 2000s had too many catastrophic events (dot com bust, housing crash, etc.) to be considered normal.

We could look at rates going back even further than 1972, but then we’re not comparing apples to apples. In the early part of the 1900s, the government didn’t back mortgages; to qualify, you had to put down 50% and the loan term was 10 or 20 years.

That leaves the 1990s. Under President Clinton (1993 – 2001), the economy was quite robust. Mortgage rates hovered at 8% (eight year average: 7.75%).

Based on this historical data of mortgage rates, I would say 6-7% would be considered a normal range, if not a touch higher even. In fact, the average rate from 1972 to today is 8.8%.

Today’s rates are definitely low – and they’ve even gone up some. However, even if rates do go up to 6, 7 or 8% we could still consider that to be low given the data for the last 41 years.

By readjusting your idea of “low,” you can tune out the “buy now!” calls you see everywhere. With the Fed doing Quantitative Easing, rates aren’t expected to shoot up over the course of the next year. Waiting six, 12 or even 18 months isn’t going to cost you all that much money over the long-term – relatively speaking.

If a new home isn’t in your future for a year or two, don’t worry about missing out on historically low rates. As I’ve said, anything below 8% is historically low and should be considered a great rate!

If you need a home mortgage, or you want to refinance the home you’re in, give us a call. One of our Loan Officers will work with you to find the best loan product to suit your situation.